Few in online auctions use escrow services

Despite the rise in online auction fraud, few users are taking advantage of escrow services, the one sure-fire way to protect themselves.

January 2, 20024:43 PM PST

Despite the rise in online auction fraud, few participants are taking advantage of the one surefire way to protect themselves: escrow services.

Escrow services that hold the payment while bidders inspect their auction items in person are a "no-brainer" for buyers, Gomez Advisors senior analyst Sue Rothberg said.

"For the buyer, it's a great thing," Rothberg said. "All the issues involving fraud and dealing with someone you don't know are removed."

But few sellers tout the service, and even fewer bidders use it.

Sellers say that using escrow services delays the transaction, drives up its cost, and gives bidders the opportunity to return merchandise even when it's exactly as advertised. Meanwhile, many bidders seem to be unaware that the option exists.

"It's an extra step," said Sue Outland, who has been buying and selling Barbie dolls and Beanie Babies on eBay for the past three months. "It doesn't necessarily occur to people to do it."

But more people may be looking for online protection after an alleged scam on eBay last month in which a seller allegedly defrauded buyers out of thousands of dollars after manipulating his feedback rating.

The alleged scam is part of a larger fraud problem faced by online auction sites. Consumers filed some 11,000 complaints about online auctions with the Federal Trade Commission last year, up from 107 in 1997.

Online escrow companies such as Escrow.com and i-Escrow are buffers between buyers and sellers. Instead of paying the seller directly, bidders pay the escrow company. The company sends the payment on to the seller only after the bidder receives and approves the auction item.

More auction users are using escrow services, but they still only represent about 5 percent of all transactions, according to i-Escrow spokesman Johnny Wong.

i-Escrow, the leading online escrow service, has seen its user base grow about 1,500 percent in the last year to more than 250,000 users, Wong said. However, that's still a small percentage of overall buyers. He blames the low adoption rate on a lack of awareness.

"The word escrow is foreign to most people," he said.

Bidders and analysts say that the cost of the service is also discouraging. Escrow companies typically charge a transaction fee for the service. Escrow.com, for instance, charges users 3.85 percent of the closing price for amounts less than $5,000.

Although buyers and sellers determine among themselves who will pay the fees, the cost can dissuade either one from using escrow. For buyers, escrow fees come on top of the shipping costs, not to mention the actual closing price of the auction. For sellers, the cost is in addition to the listing and transaction fees charged by many auction sites.

Escrow services also protect sellers from chargebacks from credit card-paying customers and from bad checks, Wong said. But at least one seller said he doesn't trust the service.

James Reichel has sold diamonds and other jewelry on eBay for the last year. The Booneville, Mo., resident said he lost more than $5,000 in December when an eBay bidder sent him a fake cashier's check for a ring.

Even so, Reichel said he has never used an escrow service and doesn't plan to in the future. That's partly because there are so many new companies offering escrow or billing services.

"I'm sure there are some good ones out there," Reichel said. "(But) I don't like the idea of somebody getting your money."